Tuesday, January 12, 2016

Several Republican candidates’ health care plans contain a large hidden employment tax that would slow down the nation’s economy.

Our federal systems of taxes and subsidies are known to discourage work by levying more taxes on (and paying fewer benefits to) workers than non-workers.

The only important exception comes with the tax treatment of health insurance obtained on the job, which workers can exclude from the income that is subject to payroll and income taxation. The exclusion generates an annual average of $4,000 in tax savings for each of the 75 million workers that take advantage of this employment perk.

Jeb Bush, Ted Cruz and Marco Rubio, to name a few, agree that workers should lose this perk that gives them a $4,000 reason to work rather than not.

They are not against work, of course, but are against uneven taxation. By making job-related health insurance a unique tax shelter, the exclusion leads to excessive health spending – “Cadillac” health plans – and distorts the composition of economic activity toward businesses that have advantages in providing the shelter.

Rubio, for example, proposes tax credits for purchases of individual health insurance and putting “the tax preference for employer-sponsored insurance on a glide path to ensure that it will equal the level of the credits.” The credits are intentionally limited so that they do not favor expensive plans any more than economical ones.

Introducing a credit for purchases in the individual market, as the Republican candidates propose, is an especially new opportunity for people who do not work and thereby further pushes the federal thumb on the scale favoring not working over working.

Take a 62-year-old worker who is considering retirement. A number of federal policies encourage him to retire sooner rather than later by replacing – at the expense of all taxpayers – part of the wage income lost upon retirement. A retiree pays less income tax, pays no payroll tax, and gets a monthly check from Social Security, whereas the 62-year-old who continues work would not get these privileges. Republican plans would change this by giving him a new tax credit if he retires early.

The special treatment of the health insurance obtained at work is the only major pro-work incentive that the federal government currently has for this 62-year-old. The Republicans are achieving their even-tax objective by reducing the incentive to work.

By my estimates, the economic damage done by further reducing incentives to work is not worth the enhancements to health care delivery that would come with taxing things more evenly. I am not aware of any study even attempting to show otherwise, because the studies of health insurance delivery largely ignore the labor-market burdens created by policies that promise to make health care better.

Just this week, Congress delayed until 2020 Obamacare’s “Cadillac” excise tax on health plans that are provided by employers, which is Democrats’ answer to the uneven taxation problem. But the Cadillac tax does a lot less to discourage work than the Republican approaches do (I cannot say the same about the rest of Obamacare), because the Cadillac tax still lets workers keep much of their perk.

To their credit, Republican candidates have other plans to encourage work, especially by bringing down personal income tax rates. But, in order to get the economics right, they should not be double-counting the benefits of reducing rates. By eliminating or partly offsetting the health insurance exclusion, tax rate reductions are needed just to get the labor market back to where it would have been if the exclusion had continued.

To put it another way, more growth would come from cutting rates and keeping the exclusion in place than would come from cutting both the rates and the value of the exclusion together, which is what many Republicans are proposing.

Bipartisan neglect of the work disincentives that come with health reform is a major reason why we continue to have a Pinto economy. We’re left hoping that tax plans might create jobs faster than health plans kill them.

Casey B. Mulligan is a Professor of Economics at the University of Chicago and author of Side Effects and Complications: The Economic Consequences of Health-Care Reform published by the University of Chicago Press and featured at acasideeffects.com.

Supply and Demand (in that order)

The basic tools of supply and demand help immensely to understand and predict everyday events in our world. These days, many of those events are related to the Redistribution Recession of 2008-9. But I also look at other issues related to fiscal policy, labor economics, and industrial organization.